The Real Policy Makers

By Robert B. Reich

Published: September 29, 1998

BOSTON—
American democracy is upside down. While Congress, the President, talk radio and yell television are obsessed with sex and scandal, the big decisions affecting our lives are hidden from view and made by people largely unaccountable to democratic processes.

Today the Federal Reserve Board's Open Market Committee will decide what to do next about short-term interest rates. If the Fed decides to reduce interest rates today, jobs will stay plentiful for a while longer, wages will continue to inch upward and homes and cars will become somewhat more affordable.

Some economists -- citing the current 4 percent annual growth in wages -- worry that lower interest rates would cause the economy to overheat and inflation to accelerate. That seems unlikely at a time when one-half the world's economies are stagnant or shrinking. And even if it proved true, a little inflation may be worth the extra jobs and higher wages that would come with it.

How do we decide whether the risk is worth it? We don't. It's all up to Alan Greenspan and his colleagues, and they will decide today in secret. (Summaries of their proceedings are eventually made public.)

In the old days, when America had a fiscal policy to speak of (that is, when Presidents and Congress were willing to spur the economy through public spending and tax cuts) and money didn't rush nearly as fast or as easily across national borders, decisions like this were important but not all-important. Elected officials could still fashion domestic policies affecting jobs, wages, the poverty rate and the availability of homes and cars. Now all of these depend on prevailing interest rates, which in turn depend largely on the Fed.

America used to have a real foreign policy as well, and an apparatus for setting it: a State Department run by people knowledgeable about the politics and societies of places around the globe, as well as a national security adviser and Congressional foreign affairs committees. But now our foreign policy depends largely on global flows of money, and our apparatus for influencing them is almost totally removed from democratic oversight.

Asian economies continue an implosion that began more than a year ago, when money began rushing out in search of safer havens. What had until recently been called the ''big emerging markets'' of the world are now big submerging markets. Capital flight is, by its very nature, a self-fulfilling prophecy: the last ones out are left holding a near-worthless bag. Much of the money has come to the United States, which is one reason the value of the dollar has soared and the stock market reached astronomical heights this summer. Of course, that was before the high dollar clobbered exports and squeezed corporate profits, causing Wall Street's bubble to burst.

Lower interest rates might help in this capacity; they would make the United States relatively less attractive to global capital, thus relieving some of the pressure on countries on the losing end. Lower rates would also reduce the value of the dollar, easing the plight of American exporters. Cutting rates would also send a signal to central banks abroad that they could lower their own interest rates.

Of course, much of this depends on the other new force in American foreign policy: the International Monetary Fund. For years, in part because of the influence of the Treasury Department, it sought to open other countries' borders to global capital. More recently, and again at the Treasury's urging, it has been trying to stanch capital flight. It has lent developing countries billions of dollars on the condition that they increase domestic interest rates, reduce public spending and deregulate state-run enterprises.

The avowed purpose is to convince global lenders and investors that they should not abandon ship. But the enforced austerity has had perilous social consequences -- driving up prices of food and fuel, increasing unemployment, smothering local businesses and shredding social safety nets.

It's a delicate balance. Without the I.M.F.-imposed austerity even more capital might flee. But those on whom the burden of austerity has fallen most heavily hardly benefited from the huge influx of speculative money to begin with.

The Fed, the I.M.F. and the Treasury are staffed by skilled economists, but can we be sure that the choices they make are the right ones in the eyes of most of the people whose lives are being altered by them? These experts, by and large, have no particular knowledge of politics or sociology and no special insights into what arrangements may be deemed just or unjust in places around the world. Nor are they accountable in ways that might provide them guidance.

Russia's defaulting on its short-term foreign debt last month spooked global creditors who worry about possible defaults elsewhere, especially Brazil. Japan is seemingly paralyzed. The United States remains in fairly good economic shape, but there are worrisome signs: exports continue to drop, consumer confidence has started to dip, and housing starts and commercial property prices are receding.

Officials at the Fed, the I.M.F. and the Treasury are scrambling to contain the problem. President Clinton has asked Congress for $18 billion to shore up the I.M.F., but any such prospect has dimmed in the last few months. He also has asked Mr. Greenspan and Robert Rubin, the Treasury Secretary, to convene a meeting of major central bankers and financial officials to figure out the next steps. But few Americans heard him do it -- we've been too busy parsing his definition of ''sexual relations.''

The global crisis is too important to be left entirely to central bankers and financial ministers. One reason governments exist is to insure that economies function for the benefit of people, and not the other way around.

In the short term, the Fed should lower interest rates -- by a full percentage point before year's end. There should be a coordinated large-scale reduction in global interest rates. Rather than demanding austerity, the West should allow troubled currencies to fall to some degree. We should slow the flow of hot money now racing across borders, possibly by having countries tax short-term capital flows. The important thing is that any such decisions involve subtle weighings of human needs and social justice.

The global economy is less sexy than what's on most Americans' minds these days. Yet there comes a point when a democracy must attend to what's important rather than to what's titillating.

Drawing (Maris Bishofs)

Robert B. Reich, a professor of economic and social policy at Brandeis University, was Secretary of Labor in the first Clinton Administration.